International Investment Rules “Out of Sync” with 21st Century Challenges

"Here we are in the middle of a climate crisis, and we have investor lawsuits against governments over policies to encourage renewable energy," says Sarah Anderson at a UN preparatory event for the Financing for Development summit.

“I want to start with a bit of history that I just learned this week. It has to do with the annual World Bank meeting 50 years ago in Tokyo. It was at this meeting that there was a vote to endorse the convention establishing ICSID, the international arbitration tribunal associated with the World Bank. What I just learned from an article by Dr. Robin Broad, of American University, is that 21 governments actually voted “no” because they saw the investor-state dispute settlement regime as unnecessary and unfair. They included every Latin American government in attendance and they became known as the “Tokyo No.”

I raise this because today, 50 years later, I think the “Tokyo No” have been vindicated. The international investment regime is suffering a deep crisis of legitimacy and the Financing for Development Summit offers a very important opportunity to help chart the course for reform in ways that promote sustainable development.

A major overhaul is actually inevitable given that the current system is so clearly out of sync with the key challenges of the 21stCentury. In the middle of the climate crisis, we have cases against governments over policies to encourage renewable energy. In the wake of the financial crisis, we still have agreements that restrict the use of capital controls and other policies to promote global financial stability. In the wake of the Fukushima disaster, we have a case against Germany over their decision to phase out nuclear power. And at a time when tobacco-related health costs total about half a trillion dollars per year, governments are facing foreign investor lawsuits over anti-smoking laws.

Yes, states have agreed to these treaties and their enforcement mechanisms. But I think many of them agreed to them at a time when the full implications weren’t known. And in fact I will admit that as someone who worked on the NAFTA debate 20 years ago, I did not fully grasp at that time the implications of the Ch. 11 on investment.

One particular case that my organization has been deeply involved in is a prime example of how the current regime can make it difficult for governments to pursue sustainable development. This is the Pacific Rim v. El Salvador case, which centers on the company’s demand for a permit for a gold mining project that many fear could contaminate the country’s primary source of drinking water. Two successive governments have declined to grant a permit in order to protect this water. But instead of a pat on the back, what they’ve gotten is an expensive lawsuit at ICSID – nearly $13 million in legal costs so far – and facing a demand by Pacific Rim for $300 million.

And if you think the Pacific Rim case is disturbing, what’s even more disturbing is to think about how many times policymakers might’ve wanted to take action to protect their country’s water, or public health or some other public interest measure but didn’t because they didn’t want to deal with an expensive investor lawsuit. That’s the real danger, the “chilling effect,” which we can’t fully measure, but we know exists.

I would also want to flag an area where I think the Financing for Development summit is especially well-positioned to make a real difference —and that is in how these investment agreements handle the issue of volatile capital flows. Yes, as the Monterrey Declaration pointed out, private capital flows can complement development efforts. But they can also completely undermine them if they are too volatile. There are a variety of policies to manage capital flows that have proved effective, but most investment treaties still prohibit them.

This is a completely outdated approach. As you may know, the IMF adopted a new official position in 2012 that supports the use of capital controls to prevent or mitigate financial stability under certain conditions. They also acknowledged the conflicts between this position and some trade and investment agreements. The Finance for Development outcome document should build on the IMF’s statements and call for strong safeguards for capital flow management policies.

I’ve been asked to save most of my thoughts about alternatives for the discussion period, but let me say that I’ve thought quite a bit about this because I was on an advisory body to the Obama administration to give input into the U.S. model Bilateral Investment Treaty. And we produced voluminous recommendations for how to change these investment treaties so that they support the public interest. But let me just address the core issue, which is investor-state dispute settlement. My view is that we’d be better off without it, and I applaud the efforts of some governments that are withdrawing from this system. I would also say that if foreign investors were required to exhaust domestic remedies, I think most of the most egregious cases would like disappear. There could also be a futility clause, so that if a military junta comes in and steals your property without paying you a cent, you could make a case that it would be futile to seek recourse domestically.

I want to finish by thanking you for this opportunity. As I said, I think major changes are inevitable, and it would be very helpful to have the Finance for Development summit help chart the next phase of the regime so that it is designed to advance sustainable development.”